Don Nicolson: History's lesson shows protectionism the tipping point

If one thing scares New Zealand's farmers, it isn't the price of commodities but what's happening in the halls of power around the world, as countries react to the global financial crisis.

Today the world stands at a precipice. The clock is at five minutes to midnight. Protectionism is emerging from its economic crypt and seeping into legislation from Cairo to Washington.

With protectionism New Zealand's voice carries genuine diplomatic weight. We've been there and come out the other side better, stronger and fitter.

The time has come to use our "poster" status to ensure a protectionist repeat of 1930 never takes place. The stakes are high, very high.

The Great Depression conjures images of loss, desperation and despair. It's no surprise many people directly link the 1929 sharemarket crash as being its cause.

Yet 1929 and 2008 are not the cataclysms commentators like Rod Oram make them out to be.

What happened last year, as in 1929, was the end of a speculative bubble centred on the arrogant invincibility of some very smart people. When the whole edifice crashes down it's easy to panic - to just "do something".

The concept of disaster depends on how immediate it is to people you know. Both 1929 and 2008 struck the same circles politicians of the day mixed in. This amplified a sense of shock for it struck the very people they knew. It created the need to "do something".

In December 1929, Andrew Mellon, Treasury Secretary to the freshly-elected President Hoover, coolly recommended "liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system".

"High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people."

Although rough sounding there is a grain of sensible truth. So what happened?

President Hoover convened conferences with the great and the good that sounds vaguely familiar today. Instead of Mellon's tough medicine, protectionism was latched on to as a curative.

Protectionism is built on the fallacy that international trade is a one-way street. Tariffs can be applied to imports without retaliation. It was not the 1929 crash that created the Great Depression but a protectionist response following in its wake.

The United States Smoot-Hawley Tariff Act of 1930 was a template for economic suicide. One emulated from Paris to Wellington. It created a crisis so severe that it took a world war to end it.

What do we see brewing in 2009? Europe's other farmers are clamouring for the subsidy drug their dairy farming colleagues have recently scored.

Federated Farmers NZ sees the logically flawed "Food Miles" concept emerging as a possible non-tariff route for protectionism to take hold. Subsidies and protectionism seems a core part of the European Union's DNA.

The US Senate's initial version of their stimulus Bill widened a "Buy American" clause to anything that could be funded as part of the package.

Thankfully, President Obama was alert to this overt protectionism. The fact remains that a majority of Democrats voted for it in the House then the Senate.

The Republican senator, John McCain, warned his Senate colleagues that, "should we enact such a provision, it will only be a matter of time before we face an array of similar protectionism from other countries - from 'Buy European' to 'Buy Japanese' and more".

"Buy American" now forms part of the US$787 billion stimulus package signed into US law. The only concession made to the President is that it must be "consistent" with existing international treaties.

This fudge is now being manipulated to ensure that the US military "Buys American" first. Here, the Green's Sue Bradford says we should do the same with Swazi outdoor clothing business. We should all be alarmed.

If you need more convincing just compare these two quotes spoken 79 years apart. With the passing of the 2009 stimulus package, the Democrat sponsor of "Buy American", Senator Sherrod Brown, said, "this will help ensure we are doing all we can to promote US businesses and create jobs, which is the purpose of the economic recovery bill".

In 1930 the Republican senator, Jim Watson, speaking ahead of the Smoot-Hawley Tariff Act said, "if this Bill is passed the nation will be on the upgrade financially, economically and commercially within 30 days and within a year from this date, we would have regained the peak of prosperity".

If there is one glimmer of common sense it doesn't come from a politician but a redundant dairy worker in Lithuania. Quoted in Britain's Observer, "our bodies got fat, we got lazy on EU subsidies, our souls got crushed. This crisis will do us good". Perhaps Mellon was right.

* Don Nicolson is president of Federated Farmers.